Hello and welcome to the AIB Group plc Q3 2024 trading update. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only mode. However, you'll have an opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your questions. If you require assistance at any point, please press star zero, and you'll be connected to an operator. I will now hand over the call to your host, Donal Galvin, to begin today's conference. Thank you.
Good morning, everyone. Thanks for joining the call. Colin Hunt here, and I'm delighted to be joined by our CFO, Donal Galvin. We're gonna focus most of our time this morning on questions coming from you, but first, I want to say a few, introductory, opening remarks. We are really, really pleased with how, AIB is performing. We've had an excellent outturn in the year to date, and we are, well set for another exceptional performance for the full year. In addition, we are confident about the outlook for the business, and we will be entering 2025 with great forward momentum, so some highlights to be called out: gross loans moving above EUR 70 billion, an increase of 5% since the end of last year. That's the first time, we've had, gross performing loans at that level, in about 15 or 16 years in a fundamentally transformed group.
New lending up 17%, 35% of it green or transitional. Mortgages up 10, very solid performance in the mortgage market, 36% year to date. Personal lending growing up 8, SMEs growing up 4, capital markets up 11. And meanwhile, credit quality remains very robust, which reflects not only the strong economic backdrop, but also our continuing conservative approach to underwriting. So it's a really strong performance, reflecting the lead role that we played in the consolidation of the Irish banking industry and the enduring strength of the economic backdrop in Ireland in our core market.
The outlook is for solid economic growth above 2% over the medium term, and indeed, our own PMIs are highlighting a brightening of conditions, which I suppose is not too surprising, given the strength of the Irish fiscal position, a growth-supportive budgetary stance, and more accommodative monetary policy. Given the performance year to date and the domestic economic environment, we're upgrading our loan book guidance to growth for the full year of between 5% and 6%. Before I turn over to you, let me leave you with a few final thoughts. Our business is really well positioned. It is performing very, very strongly, and we look to 2025 and beyond with confidence. Our strategy is clear, the plan is working, and we remain committed to delivering sustainable returns for our shareholders. Turn over to you.
We're now ready for questions, please. Thank you. As per reminder, if you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the first question from [Liane Shilshere] from JP Morgan. The line is open now. Please go ahead.
Thank you for the questions. I've got two on NII, if you could help me, please. Firstly, can I ask your thoughts on the moving parts, on NII into 2025 and how you're thinking about consensus 2025 and 2026 NII? This is in reference to the comments that you made at the half-year stage around you being comfortable with some of these numbers. And secondly, on the hedge, you've talked about the management of the structural hedge program, in reference to the outlook for 2025 in your statement, or in reference to the outlook, should I say, in the statement. How are you thinking about the hedge in the context of the stability that you've seen in the deposit base, both in terms of the size and the duration? Thank you.
Hi, thank you very much for those questions. I'll take those. I think, with respect to net interest income, it's good just to get a solid baseline on the liability side. Throughout 2024, we've had a really strong performance in our deposit portfolio. It's increased in the year by around EUR 3.2 billion. 92% of our deposits are in the Republic of Ireland, which means at the end of the third quarter, we had around EUR 100 billion of liabilities, which is an increase of around EUR 3 billion in the year. The performance underlying those, interestingly, in the first half of the year, the movement to term was reasonably consistent at around EUR 600 million per month, flowing from, let's say, current accounts into term.
But what we've noticed throughout Q3 is that there's just been a slight slowdown, as you would naturally expect, with the reduction in ECB rates, and that's now reduced to around 3 or 400 million euros a month. So certainly, as we look to the end of the year, betas for the year are likely to be less than 15%, and they're around 12% as we sit here today. Moving into 2025 and 2026, we see ECB rates at the end of 2025, 2026 at around 2%. So I'm not gonna go into all of the moving parts, but certainly, where consensus is at the moment for these, those years at around 3 and a half billion euros, you know, we're very comfortable with those levels. And the reasons why we're comfortable is probably threefold.
Number one, you know, we've got a better understanding of the underlying movement of deposits. Number two, throughout 2022 and 2023, we obviously significantly did increase our structural hedge, not just in terms of quantum, but in terms of duration as well. There's no material change to the strategy from the half-year, but that's really gonna begin to perform in 2025, 2026. You know, the excess receive fix rate is around 2.5%, so that's gonna come. That's gonna show a strong performance into 2025 and 2026. And then probably the only thing that we've got a little bit more visibility now is on the asset growth. So this year, we're gonna have 5%-6% asset growth, and that's across all of our main markets.
This is gonna move this. We think this is gonna continue into 2025 and 2026 as well, where we see asset growth of around 5% per annum going forward. So putting all that together, it gives us a lot of comfort around the NII in the outer years.
Thank you. We will take the next question from Diarmaid Sheridan from Davy. The line is open now. Please go ahead.
Good morning. Thank you. Maybe just a quick follow-up, firstly on your last point there, Donal, around asset growth, and the 5% per annum. Obviously, a very strong performance in Q3. Maybe you could just talk to the moving parts, particularly around the Capital Markets side, what areas are growing strongly there, and just maybe more broadly around the next couple of years, what areas do you expect to see that kind of strong growth to deliver that 5%? And maybe secondly, just around capital returns, if I may, you know, obviously, a very strong capital position again, points to a greater than 100% payout if we look at the entirety of 2024 distributions. Is that something that you think is possible? You know, to the extent that you still have a very strong capital position next year, is that something that could, could occur with full year 2025 also? Thank you.
Okay. Good morning, Colin Hunt here. I'm just gonna cover the loan growth segment. Well, notwithstanding the fact that we've significantly diversified our balance sheet, our loan book in the last number of years, the largest single component is still mortgages. So that's the key driver of the loan book. And given the shape, the demographics of our customer base, there's a very strong influence brought to bear by the pace of construction. What we'll do 35,000-36,000 units this year, and it seems that within the next three years, we'll be hitting levels of about 50,000 units. So that gives great ballast to the prospects for loan growth in the mortgage business. Personal lending continues to grow at a decent clip. We can see the pipeline unfolding in front of us.
SMEs, certainly, I think at the half-year, I said that we were of the view that we might have passed the point of inflection in terms of business lending. I think we have. You know, we can see that greater appetite coming through for SME borrowing. U.K. business performing well. I think about 8% up. Private capital performing strongly. Corporate banking performing well as well. So really, looking all the way across the entirety of the business, we cannot pick one area out as being a significant underperformance. Every part of the business is performing very, very strongly at this stage. And we expect that to continue. You are gonna see a shift in terms of the composition of the book over time, a very gradual shift in the composition as private capital, which has a significant number of exposures in developed international markets.
You will see slightly less exposure to the Irish economy and more to the economies of the United States, Britain, and Europe. But that's driven very much by our activity in the renewable lending space.
Yeah. Hi, Diarmaid . Donal here. Just with respect to your question on capital returns, look, our focus is always, until the year is completed, focus on ensuring that we can deliver as strong a financial performance as possible. I think you can see the trajectory here from quarter three results is that we're gonna have a very strong outturn for 2024, and that puts us in a very, very strong position to have discussions with both our board and our regulator around distributions. Obviously, we will be looking to close our first SRT in November. We've guided what we believe are some of the positive impacts and benefits from Basel IV. And the way we look at capital is over a multi-year period to see what the most appropriate level of payout is for our shareholders.
So, I think from that perspective, we're painting a really, really strong picture, both for our board and our regulator, and we will obviously continue to look to move towards our medium-term target. And I think if you look at our track record in returns, I think that would back up our ambitions and our ability to return capital to shareholders. Yeah.
Thank you. We will take the next question from Andrew Stimpson from KBW. The line is open now. Please go ahead.
Good morning, everyone. Could you just talk about the difference, if there is one, between the growth in risk-weighted assets versus the loan growth that you're gonna see, and whether you think the risk-weighted assets are gonna end up growing faster than loan growth before you do any SRTs? And then secondly, on the SRTs, could you just talk us through the costs and the volume of the loans that would be in that transaction, and how long that benefit amortizes over? Appreciate if you have to wait until full year before you can answer that second. Thank you.
Hi, thanks very much. Look, broadly speaking, our loan growth and RWA growth move in tandem, okay? So that's at the highest level. If we go down a few layers, there's always quite a number of moving parts. Obviously, you know, in the last quarter, we've had the onboarding of some Tasman assets, and we're in a perpetual state of IRB modeling, corporate improvement, etc., over a multi-year period. So there's always going to be some ins and outs. Certainly, what's in front of us at the moment, what we can see is the benefits that we'll see by the end of 2024 from the SRT. And this was a reference portfolio of around EUR 1 billion of corporate assets.
We'll have a RWA benefit of around EUR 800 million, or 20 basis points of CET1. And the cost of that, oh, in the greater scheme is fairly negligible, EUR 6 million or 7 million. Really, the rationale for that transaction was for it to be, number one, a new asset class, for us to securitize, being corporate loans. We have infrastructure in place already for mortgages. And it was really important to us that we got a clear understanding with the regulator on our ambitions in this area and indeed with investors in this asset class so that they could understand our credit scoring and our credit model. So, although this transaction is likely to pay down quite quickly, you know, I see it more as a multi-year program.
I think as we move forward, we can look to be a little bit more ambitious in terms of structure and size. And that's really just on the corporate asset class. As we go forward, we will look to securitize mortgages and other types of assets as well. And over time, that's obviously going to give us a smoother RWA trajectory or indeed in areas where we feel we might have egregious RWAs, try to soften that blow a little bit. But I'll be able to give a better update at the full year on that and what the trajectory is gonna look like. But that's broadly speaking what the trajectory is going to look like.
Thank you. We will take the next question from Robert Noble from Deutsche Bank. The line is open now. Please go ahead.
Morning. Thanks for taking my questions. Can you tell us what your experience of rate cuts has been so far? How much have you changed the loan and deposit rates since 2024? And if you could highlight any pricing lags on those books as well. And then, secondly, on the structural hedge, so the exit rate's 2.5% at the end of the year, that's broadly where swap rates are at the moment. So at the maturities next year at a lower yield. And is that how you get to expecting tailwinds in 2025, 2026? And, similarly, ex the mortgage portfolio, right? So how's the roll of that look like going into next year? Thanks.
Hi, with respect to rate cuts, I would assume we've been fairly static overall. We haven't really moved on any deposit rates. With respect to our mortgage product, we've just implemented some rate cuts for high-value mortgages. I do expect towards the end of the year or indeed next year that this is gonna be under review as ever. We always look at both sides of the balance sheet, really over the medium to long term, ensuring that we can maintain that strong NII and NIM profile. With respect to the structural hedge program, really where you're seeing the benefits, I mean, we have an exit yield of 2.5% on effectively EUR 35 billion a hedge, that was obviously a big drag throughout 2023 and 2024.
Obviously, as swap rates move towards that two and a half level, you're coming back to being at the money, should we say, on swaps. Certainly, we believe throughout 2025. Indeed, as we go into 2026, we will see benefits from those hedges. The maturity profile of the hedges, it was quite heavy, for 2023 and 2024, maybe EUR 10 billion per annum, maturing at lower rates. As we go out to 2025 and 2026, the maturities of the SHP are gonna be far lower at five, maybe 5-6 billion euros. That's really due to the fact that we had extended the duration quite a bit throughout 2023.
So as we go into 2025, 2026, the structural hedge component will be a material contributor to NII or protector, should we say, in that falling rate environment, which is what gives us the comfort on those outer years.
Thank you. We will take the next question from Denis McGoldrick from Goodbody. The line is open now. Please go ahead.
Good morning, Colin and Donal, and thank you for taking my questions. Just two, if I may, please. What are your latest expectations for fee income growth, as we move into 2025, and then secondly, how do you see the cost base evolving into next year, and what's the right mix we should think about in terms of inflation and investment versus ongoing savings? Thank you.
Yeah. Overall, on other income, we had guided greater than EUR 700 million for 2024, having a strong performance overall this year. I'd expect that we'll do a little bit better than that. Overall, the underlying fees and comms are probably up 6% for the year. And that's the kind of trajectory that we would, you know, imagine going forward, certainly 5%-6%. You know, the challenge for us is, you know, having onboarded a huge amount of new customers with the changing banking landscape, ensuring that we get them fully integrated on our platform and begin to offer them a lot more products. So that really is gonna be the opportunity for us. But we're really happy with how the businesses are operating.
We're seeing good performances in wealth and in our Goodbody platform, with AUM up from around EUR 11 billion up to EUR 12.5 billion in Goodbody. So very happy with the trajectories there. With respect to cost, you know, it's coming out of this highly inflationary environment, you know, we're really focused on managing headcount. You know, headcount is what is really what attracts costs at the end of the day, ensuring that we can keep that at a flat level and then gradually reduce it over time, is gonna be one of our key goals. That's going to require investment in the business to automate to different processes that already exist, and that's an ongoing multi-year process.
So I wouldn't imagine that you will see a significant change in our depreciation line from investments, though we will, obviously, continue to invest in technology. but the area that we're really focused on to manage costs is on the headcount line. and that's gonna be a multi-year challenge, not just for AIB, but for all banks.
Thank you. We will take the next question from Grace Dargan from Barclays. The line is open now. Please go ahead.
Hi, morning. Thanks very much for taking my questions. So just coming back on NII, if I may, thinking about the Q4 exit. So you've upgraded your loan growth guidance for full year. And actually, I think Q3 NIM was probably coming in a little bit stronger than maybe people were looking for. But you have kept your NII guidance unchanged for the full year, which is potentially implying a bigger step down into Q4 than maybe previously looked for. So I guess my question is, has your view of Q4 NII changed? Is it any worse than it was? And then secondly, just on mortgage competition, and just to ask kind of how you're seeing that evolving at the moment, and how you're expecting that to kind of progress. And I guess in a falling rate environment, how you're thinking about mortgage spreads in particular. Thank you.
Good morning, Grace. Colin here. I'll cover the mortgage question. Like, I'm sick to the teeth of saying I'm talking about us not targeting a mortgage market share, and I know nobody believes me, but we don't actually explicitly target a mortgage market share. Our focus is on ensuring that we've got decent product delivered efficiently in the way our customers want, cautiously and conservatively underwritten and priced in a rational way given the prevailing monetary policy environment, so we're not overly obsessed with what people or what anybody else is doing out there, and we're not gonna chase market share. We think that is chasing fool's gold, to be absolutely honest with you, because we've seen the impacts in the past of people irrationally building market share in Ireland. We will not do that.
Look, the mortgage business is performing really, really strongly. We have introduced some new green rates. We were in on the fixed side, we were limited to a five-year fix. We now have shorter tenor fixes there as well. The product seemed to be well received by the customers. Fulfillment is something that we do very well at AIB, and that is a key concern for customers. I know that when people in the investment industry look at the mortgage business, they immediately focus on price and focus on margin. But customers actually look at a far, far broader array of influences, including fulfillment. And that is something that we do, and we do very, very well.
So, like, I wouldn't expect to see any significant change in mortgage margins from here, to be perfectly frank with you. And as I said, very encouraged with what we've seen in terms of the performance of the business year to date, up 10%. And given the fact we're going to have probably more mortgages being sold next year as the housing market output picks up, I think it's reasonable to assume we'd have another very good performance next year. And we can see the pipeline. The great thing about this is that people come to us well in advance of actually inking a document to buy a house. So we see the pipeline months in advance, and we are very, very strongly encouraged with what we're seeing coming through at the moment.
Yeah. On NII, definitely, no unusual surprises there. I mean, rates have obviously been a little bit volatile. Previously, when we gave guidance, we would've imagined an ECB rate at the end of the year at 3.25%. That looks like it's gonna be more like 3% now, but very comfortable with the guidance, and I would reiterate that it's greater than EUR 4 billion, so very, very, very happy with that. Look, as rates begin to fall, inevitably, you will see a gradual decline in NII, but you know, you're coming from NIMs 330, you know, even for Q3, 320. You know, what we're really focused on now is ensuring for the medium and outer years that we can kinda land on a really strong and sustainable NIM.
And I've effectively kind of guided you towards where I think that could be overall. So definitely no negative surprises. And probably for 2024, the only surprises that we have had are positive surprises. So only a couple of months more to go when we're close out the year.
Perfect. Thank you.
Thanks, Grace.
Thank you. We will take the next question from Guy Stebbings from BNP Paribas. The line is open now. Please go ahead.
Hi, morning. Thanks for taking the questions. The first one was just going back to capital caps on distributions. I mean, understanding how you'll set your excess distributions is very much at the forefront of investors' minds. So, I guess you start from about 15.8%. Sounds like we should expect 20 basis points in November from the SRT. The Q3 run rate post-dividend accrual was 30 basis points. So perhaps you're expecting something similar for Q4. And that gets you comfortably north of 16%. So is there anything more you can say about what you'll have particularly in mind when determining the potential size of any excess buybacks? And then the second question was on asset quality. Could you elaborate any further specifically on asset quality in the third quarter?
I mean, should we be thinking that Robert's reference in the statement means that cost of risk that was in the 20-30 basis points range? Your comments certainly sound like you're very confident on delivering at the lower end of the 20-30 basis points this year. Thank you.
Yeah. Look, on capital distributions, I think all your calculations there are obviously very accurate. You know, when I put together kinda capital plans, looking at financial plans, I'm always just trying to create as strong a picture as possible. You know, you wanna have a financial outlook that's realistic, and you wanna have a capital position that's very strong, and that's how you put yourself in the best position possible to have discussions with, particularly with your regulator, but also with your board. So that's really what we're doing here, and I think the financial performance this year and the outlook really does paint a very strong picture, and we believe puts us in a very strong position to have those conversations.
But still a little bit too early to begin those. But in terms of distributions overall, how do we think about those? You know, we wanna maintain, you know, a strong and progressive cash dividend, and with any excesses above that, look to execute at these levels, buybacks. And indeed in that space, our preference is always to look to transact with the government on a directed basis so that we can help them achieve their goals of reducing their shareholding in AIB. And we believe we've been very successful in working with the government, the board, and the regulator over the last number of years in achieving those objectives. And we will certainly look to continue that momentum from 2024 into 2025. With respect to asset quality, normally we say 20-30 basis points cost of risk.
I think it's gonna be at the lower end of that range. You know, the Irish economy performing very well overall. You know, the one area that people tend to talk about is commercial real estate. And there has been a material repricing of assets in this space. You know, retail, you know, would've devalued post-COVID, never recovered, but managed to take another leg down. I'd say office space, challenged, particularly secondary. And we've seen valuation drops of 30%-40% in those asset classes. But they are levels that we would have imagined and expected probably from day one, and would've provided very heavily. But our experiences on refis throughout 2023, throughout 2024, even in those asset classes where you're seeing large asset price reductions has been really, really positive.
You know, so equity has been put in where required or assets are being restructured or restructured to slightly higher levels. And the flow into default is really, really, probably a lot lower than what we would've expected. And everything is still operating, I would say, in a very orderly fashion. Yeah. Not dissimilar to what we're seeing in the U.K. as well. So it's been a fairly orderly, pricing revaluation of the commercial real estate market, from where we sit.
And all the early warning indicators across the entirety of the retail and corporate estate continue to be strong. Like, so we're not seeing any noteworthy deterioration or indeed movement in either direction in terms of what our early warning indicators are saying about the state of credit in the economy.
Thank you. We will take the next question from Christopher Cant from Autonomous. The line is open now. Please go ahead.
Morning. Thank you for taking my questions. I had two, please. One on NII and then one on your longer-term targets. So on NII, Donal, I think you may have changed guidance a little bit on the call. So I think, as stated, it's circa EUR 4 billion for this year. And I was gonna come back to Grace's question, actually. The guidance as written, circa 4, does imply a very material step down in NII. Q- on- Q, I think, trying to back out the math, your NII has been dropping about 1 percentage point a fraction over sequentially for the last three quarters. And I think to get to your EUR 4 billion guidance, we need something like 13% decline Q- on- Q. So you said during the discussion, the guidance is greater than EUR 4 billion.
Putting it slightly differently, is there any reason to assume a big acceleration in the pace of NII decline, when you still actually haven't really responded on deposit pricing? It's not like you've passed on initially and now you've run out of gas. So any further color you can give us around the expectation into 4Q? As I say, it's about 1% a quarter, I think, so far. And then the other question I wanted to ask was on the longer-term ROTE guidance. Just drawing together some of the things you've said on this call, as I look at consensus, you've said you're comfortable with NII consensus. Business fees and commissions growing 5%-6% a year. I think consensus is probably a little bit below that. The OpEx guide consensus is above that.
I'm not really sure what consensus is missing in actually arriving at a better ROTE than you're targeting. So consensus is set at 16%. Your guidance is 15%. And it looks like the other income's better than consensus has in. The costs are better than consensus has in. Is there something consensus is missing in its interpretation of what you're saying? Or actually, are you now more constructive and that 15% target you set could be revisited? Thank you.
Yeah. Look, overall in NII, comfortable with greater than EUR 4 billion. I think the guidance was circa EUR 4 billion, but I think that's marginally conservative. So we're very comfortable with the year-end position. So we don't see any immediate collapse in NII. You know, like I said, we look at our assets and liabilities together. And I think as the rate environment evolves, you know, you'll see various pricing movements on both sides of the balance sheet. And we'll be able to maintain that strong NIM profile in 2025 and 2026. And that's why we're pretty comfortable talking about consensus 2025, 2026 and given that comfort. Yeah. A lot of moving parts, obviously, 2025, 2026, but going to the return on tangible equity number.
If you take those consensus numbers on NII, you know, other income can be, you know, slightly volatile. Pretty comfortable with that overall. But we'll be able to lay all of this out in a little bit more detail when we do our year-end results. The purpose today was really just to give analysts in particular a little bit of comfort around the NII trajectory and outlook around 2025 and 2026, which is really underpinned overall by a very strong liability performance and a beta profile that we're all getting a little bit more comfortable with.
Yeah. Just on targets, there's two reasons we issue targets. One is to guide the market. But secondly, also, it acts as a discipline on the business, because we regard these targets as very, very hard, bottom-line commitments to the market. And that has a massive influence in terms of how we run the business day to day, because of the externalization of those commitments. When you know we set those targets 12 months ago. They are three-year targets. We remain very, very comfortable with them, but we're not in the business of changing targets on a high-frequency basis. They are medium-term guides and disciplines for our business.
Thank you. We will take the next question from Borja Ramirez Segura from Citi. The line is open now. Please go ahead.
Good morning. Thank you for taking my questions. I have two quick questions. The first is on the term migration, well, deposit migration to term. It's great news that it is slowing down. The figure, I think, EUR 300 million of migration in the quarter, that is below what some peers are reporting. So I would like to ask if you could provide a bit more color. And then also the rate sensitivity, if you could please update. Lastly, if you could please also, I think you said the deposit rate of 2% by in 2025. If you could please confirm as well. Thank you.
Yeah. Just some brief comments in relation to the migration to term. Like, it shouldn't be at all surprising that we are seeing a moderation of pace, because the reduction in ECB rates was among the most well-heralded changes in monetary policy in modern economic history. So, like, everybody knew that rates were going to be reduced. The question was, when are we going to see it happening? So you would assume that the vast majority of customers who are minded to put their money on a two or three-year fix will do it in advance of the reduction in rates. So what we're seeing is precisely in line with our own expectations. Well, certainly, the trend is precisely in line with our own expectations. The volume may be different to that. But certainly, we have seen a marked step down in flow to term in the third quarter of the year.
Yeah. And that we've probably seen a slowdown, I mean, throughout 2024 gradually. I would say now for Q3 that is settling at a new level of around EUR 300 million-EUR 400 million per month.
Mm-hmm.
From an overall NII perspective, this has been less impactful than what we would've imagined because the overall portfolio has continued to grow. So as we are seeing, movement into term, certainly in our main ROI portfolio of around EUR 4.5 billion throughout 2024, we've also had inflows of around EUR 3 billion. So the overall effect has been far less than what we would've imagined. And I think as we see further ECB rate cuts, one could imagine that these new levels will be maintained. So we're very comfortable with saying beta for the end of the year it'll be less than 15%. Overall sensitivities, I would say, very little change from the half year. I think from memory they're around EUR 350 million, for a 1% change. For 2025 and 2026, yes, I did say we imagined an ECB deposit rate of 2%.
Okay. I think that we are drawing stumps at this stage, so it was lovely talking to you this morning, and we very much look forward to updating you on the full-year performance in the spring. Thank you again for your attention and for your questions.
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